International Product Life Cycle
The International Product Life Cycle Theory was authored by Raymond Vernon in the 1960s to explain the cycle that products go through when exposed to an international market. The cycle describes how a product matures and declines as a result of internationalization. There are three stages contained within the theory.
New Product Introduction
The cycle always begins with the introduction of a new product. In this stage a corporation in a developed country will innovate a new product. The market for this product will be small and sales will be relatively low as a result. Vernon deduced that innovative products are more likely to be created in a developed nation because the buoyant economy means that people have more disposable income to use on new products.
To offset the impact of low sales, corporations will keep the manufacture of the product local, so that as process issues arise or a need to modify the product in its infancy stage presents itself, changes can be implemented without too much risk and without wasting time.
As sales increase, corporations may start to export the product out to other developed nations to increase sales and revenue. It’s a straightforward step towards the internationalization of a product because the appetites of people within developed nations tends to be quite similar.
The Maturity Stage
At this point, when the product has firmly established demand in developed countries, the manufacturer of the product will need to consider opening up production plants locally in each developed country to meet the demand. As the product is being produced locally, labor costs and export and costs will decrease thereby reducing the unit cost and increasing revenue. Product development can still occur at this point as there is still room to adapt and modify the product if needed. Appetites for the product in developed nations will continue to increase in this stage.
Although the unit costs have decreased due to the decision to produce the product locally, the manufacture of the product will still require a highly skilled labor force. Local competition to offer alternatives start to form. The increased product exposure begins to reach the countries that have a less developed economy, and demand from these nations start to grow.
Product Standardization and Streamlining of Manufacturing
Exports to nations with a less developed economy begin in earnest. Competitive product offers saturate the market which means that the original purveyor of the product loses their competitive edge on the basis of innovation. In response to this, rather than continuing to add new features to the product, the corporation focuses on driving down the cost of the process to manufacture the product. They do this by moving production to nations where the average income is much lower and standardizing and streamlining the manufacturing methods needed to make the product.
The local workforce in lower income nations are then exposed to the technology and methods to make the product and competitors begin to rise as they did in developed nations previously. Meanwhile, demand in the original nation where the product came from begins to decline and eventually dwindles as a new product grabs the attention of the people. The market for the product is now completely saturated and the multinational corporation leaves the manufacture of the product in low income countries and instead, focuses its attention on new product development as it bows gracefully out of the market.
What is left of the market share is divvied up between predominantly foreign competitors and people in the original country who want the product at this point, will most likely buy an imported version of the product from a nation where the incomes are lower. Then the cycle begins again.